Project details 1
The Growth Premium–a Leading Indicator of the Robustness of Innovation Processes
We know when growth pays, namely, when an enterprise is adequately profitable (earning more than its cost-of-capital) thus giving investors confidence that management knows how to deliver value-creating growth. The calculation of the level of profitability identifies whether the enterprise in total is positioned to create value by growing. The analysis, taken to the business sector level, then identifies where strategic growth investments will yield the greatest value. Working with Dr. Michael J. McConnell of Finstra Consulting we have developed a leading indicator to raise a flag that even an historically strong innovation (or growth…see above) process may be maturing, may be becoming stale. That indicator is the Growth Premium (GP). GP is the market’s expectation regarding future growth, essentially the amount embedded in the enterprise value assigned to growth prospects. The current median GP for all companies over $1Billion in market cap is in the 10-15% range, well below the historical levels. Given the amount of cash sitting on the sidelines, and the anemic levels of growth of GDP, this is not surprising. The leading indicator we use is the rate of change of the GP. An enterprise with a GP well above the median should take note if its GP is declining; it is an early warning signal that the market sees stagnating innovation and lower growth. We calculate GPs for our clients and track them over time to ensure that the arc of their Opportunity Oversight processes are in play and fully working.